The Government has announced (10 May) that it will legislate to limit the length of non-compete clauses in employment contracts to no more than three months.
What are non-compete clauses?
These clauses, one of a number of ‘restrictive covenants’ that an employer can impose on an employee, restrict an individual’s ability to work for or establish a competing business after they leave. They usually last for a period of six months to 12 months. They seek to protect the interests of the employing business from the enhanced competition that an ex-employee might be able to provide, given their understanding of the business they have just left.
Non-compete clauses, and restrictive covenants generally, will only be enforceable where they go no further than is reasonably necessary to protect the ex-employer’s legitimate business interests (proportionality). While there had been a period up to the early 2000s where it was generally felt that restrictive covenants were, more often than not, held to be unenforceable by the courts, more recent judgments have been more favourable to employers in terms of upholding such restrictions.
Wasn’t there a consultation about this?
Yes – in December 2020 the Government launched a consultation regarding non-compete clauses.
The consultation offered two options for consideration:
- Legislating that non-compete clauses would only be permissible if the employer provided compensation – probably related to pay – for the period of the restraint. This is the situation in much of Europe and the US, where employees are often entitled to full salary during the period of restraint; or
- Simply doing-away with all non-compete clauses by making them unenforceable.
Ultimately the Government has decided to do neither and instead created a third option – that of capping the non-compete period to of three months. You can read the response to the consultation here.
Does this affect other restrictive covenants?
No – it is not proposed to limit the ambit of other restrictive covenants such as non-dealing or non-solicitation of customers or other employees. The Government has also stated that the legislation will not interfere with garden leave, notice periods or confidentiality provisions.
What are the potential consequences of the proposed change?
The proposed new three-month limit may make longer notice periods with substantial time on garden leave more attractive to employers (although they will have to weigh up the benefit of keeping the employee out of the market for longer against the costs – likely to be salary as indicated above – of doing so). Similarly, employees will have to weigh up the benefit of being paid to tend their gardens against being kept out of the market unable to work for a competitor. This will not benefit employees who wish to remain in the same market as they will be unable to work for a competitor but it would be likely to benefit those employees who decide to follow a different path.
Legislating only in relation to non-competes creates a potential unevenness, where lengthy non-dealing or non-solicitation clauses will stop an employee working effectively for a competitor, even if they can join after three months.
Some unanswered questions
We do not know:
- if the proposals will apply to non-competes in other types of contracts, such as LLP and partnership agreements, as well as employment contracts;
- how the change will affect longer non-competes that are already present in employee contracts – might they be void or, more likely, only enforceable up to a maximum of three months?; and
- whether any non-compete of up to three months will be valid as a matter of course, even for junior employees, or will it still have to pass the judicial test of proportionality.
When will these changes be made?
We don’t know – the changes require a new Act of Parliament, so cannot be made quickly. The Government has stated that the changes will be made when parliamentary time allows, so we simply do not know when the changes might come in. For now, employers can continue to include non-competes in their contracts as before, but it may well be worth considering alternatives at this stage.